Yesterday, Bob Barr ran a piece in the Hill outlining the politics surrounding the proposed extension of the Volumetric Ethanol Excise Tax Credit (“VEETEC”). In his piece, Mr. Barr misinterprets the Americans for Tax Reform Pledge writing:

"The highly influential taxpayer watchdog group, Americans for Tax Reform, has advised the more than 200 members of Congress who are signatories to its “Taxpayer Protection Pledge,” that voting against extending VEETC could be considered a violation of their pledge."

The pledge has two components, both are important in this VEETC case study. The pledge reads: 

"....I will ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates."

The misunderstanding of the pledge usually has to do with the second clause calling signers to oppose any net reductions or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates. In the past, calls to eliminate the ethanol tax credit without offsetting the increased revenue were clear violations of the pledge. However, the current debate is not whether to eliminate a tax credit (which is a clear violation) but whether or not to renew an expiring tax credit. This is an important distinction.

With the VEETC set to expire, baseline projections assume that the government will garner additional revenue in 2010. In essence, the VEETC’s expiration is expected and creates a new benchmark by which to judge legislation. Using the expected 2010 baseline as our metric to determine whether or not a piece of legislation (in this case the extension of the VEETC, or said another way, the reissuing of a tax credit) is in violation of the pledge, we can see that reauthorizing the VEETC would be a tax cut. Thus, if legislators choose not to reauthorize the tax credit, they are not in violation of the pledge as they are keeping revenue consistent with current 2010 projections.